Economics 4432W: International Finance

Spring 2005

General information

  • Time and place: 09:45 A.M. - 11:00 A.M.,  Tu and Th, BlegH  110
  • Instructor: Florin Bidian
  • E-mail:
  • Phone: (612) 625-7837
  • Office: Heller Hall 1274
  • Office hours: Tuesday, 11:00-13:00

Prerequisite: Econ 3101, Econ 3102

Course objectives and synopsis:

The subject of International Economics, which analyses open economies (interacting with the rest of the world)  is divided traditionally in two parts. International Trade deals with flows of goods and services among countries. On the other hand, International Finance -our subject, deals with flows of capital. As a subfield of Economics and Finance, we will use both general equilibrium techniques (i.e. supply and demand analysis in multiple markets) as well as the no arbitrage ideas specific to Finance. We will start by studying the foreign exchange market, which is the biggest financial market, dwarfing any other market by any measure, and which is ignored when working with a simple closed economy. Next we will extend the macroeconomic accounting system to the open economy framework, by understanding the balance-of-payments accounts. Once these buiding blocks are into place we will study the past and present international monetary arrangements, and we will apply no arbitrage ideas to derive parity conditions for exchange rates. We will also use modern ideas from Finance to understand international investment and capital flows. In the Finance tradition, we will learn about the foreign exchange risk and the financial derivatives used to hedge it. We will also revisit different theories of exchange rate determination and in the process we will have built a complete model to investigate fiscal and monetary policies in an open economy framework.

After taking this class you should be able to fully understand what is at stakes in the debates surrounding International Finance issues. Also you will have a framework for understanding the evolution of exchange rates, currency crises etc. Also if you interview for a job related to International Finance you should appear as well-read, aware of the important issues and with a good grasp of the pertinent tools.



International Money and Finance  -7th edition, Michael Melvin F. (Addison Wesley, Pearson Education, 2004)

It is a standard textbook for courses in International Finance, concise and clear. It will give us the basic theory needed to understand important problems. The lecture notes I will provide as we go along will be a required reading. They will add a lot of detail on some issues and build some new models.

WWW Homepage

The URL for this class is

A copy of this syllabus is available online. Material from lectures will also be posted following (or before)  the lectures. The homeworks will be available for downloading on the class homepage. The homepage also provides links to some web sites related to Economics.


Homework Assignments        20%
Writing Project        20% 
Midterm                20%
Final                  40%

Grading scale:

92%-100% A
90%-91% A-
88%-89% B+
82%-87% B
80%-81% B-
78%-79% C+
72%-77% C
70%-71% C-
68%-69% D+
60%-67% D
-59% F
I reserve the right to lower the cutoffs but not to raise them.

Homeworks/Exams /Writing project
There will be 4 homeworks. Each assignment is due in class at the due date, unless otherwise stated. No late assignments are accepted. The homeworks must be typed (except graphs and formulas). The penalty for not typing is 25% (of the points at stake), i.e a perfect homework, but not typed will bring you only 75% of the potential score. The final is cumulative. If the midterm must be missed for a documented excuse, the final will carry the extra weight. The final must be taken at the scheduled time. Nevertheless, if you have examination conflicts or three exams within a 16-hour period, you must contact me at least 2 weeks before the examination period starts. The writing project is a requirement for this writing intensive course and is explained on it's own page.

Tentative Class Schedule

I will attempt to follow the schedule outlined below.





1-Jan 18, 20


The Foreign Exchange Market

Ch 1


2-Jan 25,27

Balance of Payments

Exchange rate regimes

Ch 2

Ch 3


3-Feb 1,3

Basic parity conditions I: Interest Parity

Ch 5

HW 1 distributed

4-Feb 8,10

Basic parity conditions II: Purchasing Power Parity

Managing foreign exchange risk I

Ch 8

Ch 4,6

HW 1 due

5-Feb 15,17

Managing foreign exchange risk II

Determinants of the balance of trade and payments I

Ch 4,6

Ch 9

HW 2 distributed

6-Feb 22,24

 Determinants of the balance of trade and payments II

Determinants of the exchange rate I

Ch 9

Ch 10+notes

HW 2 due

7-Mar 1,3

Determinants of the exchange rate II

Determinants of the exchange rate III

Ch 10+notes

HW 2 due

8-Mar 8,10


Determinants of the exchange rate IV



9-Mar 15,17




10-Mar 22,24

Determinants of the exchange rate V


HW 3 distributed

11-Mar 29, 31

International investment and capital flows

Ch 7

HW 3 due

12-Apr 5,7

Macroeconomic policy in the open economy I

Ch 14


13-Apr 12,14

Macroeconomic policy in the open economy II

Ch 14

HW 4  distributed

14-Apr 19,21

Financial Management of the Multinational Firm

International Banking, Debt and Risk

Ch 12

Ch 13

HW 4 due

15-Apr 26,28

Review  and class presentations

Prepare questions to ask me


16- May 3,5

Class presentations



Final Exam: 08:00am - 10:00am Saturday, May 14

Return to the class page